State Shipping Laws Background Information

What Constitutional Law & Prohibition May Have in Common

The 21st Amendment is the lowest common legal denominator when we look at wine, spirits, and beer control. All roads come from it, all roads lead to it.

When the U.S. Court of Appeal rendered its opinion in the 44 Liquor Mart case, it essentially opined that all state alcoholic beverage laws, no matter how egregious, should be presumed valid because such intrusions can be justified by the 21st Amendment. That position was eventually overturned by the U.S. Supreme Court in a very important decision regarding commercial free speech (see below).

The question has arisen: why shouldn't state laws prohibiting direct shipments of wine be superseded by the Constitutional authority of the Interstate Commerce Clause? We would like to address that question in a very general manner in this document.

In every legal analysis to determine the constitutionality of an alcoholic beverage provision, courts struggle to balance and weigh the interests of the state in temperance as afforded by the 21st Amendment to the US Constitution with the competing federal interest, such as the Interstate Commerce Clause, the Federal Sherman Antitrust Act, or the First Amendment. If you have specific questions regarding the series of direct wine shipping lawsuits that have been filed across the country, you can find further information at the Coalition for Free Trade.

Some brief oveviews of Prohibition can be found on the Web. (Those on America On-line can find out a bit more about Prohibition simply by going to the Compton's On-line Encyclopedia [Keyword: Encyclopedia] and searching PROHIBITION, WINE, Al CAPONE or LIQUOR). Here are a few helpful links:

Introduction

The alcohol industry has two US Constitutional Amendments that first prohibited its production, then repealed its prohibition in favor of state control. The 18th amendment was the result of a great and popular movement extending over many decades. The 18th amendment, prohibiting the manufacture and sale of intoxicating liquor for beverage purposes, was ratified in January 1919 and went into effect a year later. At about the same time, the 19th amendment, giving women the vote, was proclaimed in August 1920. Prohibition ended in 1933, when the 21st Amendment repealed the prohibition amendment (the 18th) and the country reluctantly came to terms with the failed attempt at prohibiting alcoholic beverages.

Constitutional amendments are difficult pieces of legislation to enact. After the 18th and 19th were added, it was 13 years before it was done again. Targets for Constitutional Amendments are quite impressive, so just imagine what big news alcohol was in the days of the 18th and 21st Amendment (The 22nd amendment, in 1951, limited the president to two terms or to a maximum of ten years in office). The 23rd amendment, added in 1961, granted residents of Washington, DC, the right to vote in presidential elections. The 24th, or anti poll-tax amendment, added in 1964, provided that citizens could not be denied the right to vote in presidential or congressional elections because of failure to pay a tax. The 25th amendment, added in 1967, established procedures for the appointment of a vice-president if that office should fall vacant and for the vice-president to become acting president if the president should prove unable to perform his duties. In 1971 the 26th amendment reduced the voting age to 18 years. The last amendment, the 27th amendment, took 203 years to be ratified. Finally ratified in 1992, 203 years after James Madison had introduced it, it restrains Congressional salaries by barring Congress from giving itself midterm pay raises).

So, what do the 18th and 21st Amendment say? Both provisions are straightforward and concise:

Amendment XVIII (1919)

Section 1. After one year from the ratification of this article the manufacture, sale, or transportation of intoxicating liquors within, the importation thereof into, or the exportation thereof from the United States and all territory subject to the jurisdiction thereof for beverage purposes is hereby prohibited.

Section 2. The Congress and the several states shall have concurrent power to enforce this article by appropriate legislation.

Section 3. This article shall be inoperative unless it shall have been ratified as an amendment to the Constitution by the legislatures of the several states, as provided in the Constitution, within seven years from the date of the submission hereof to the states by the Congress.

Amendment XXI (1933)

Section 1. The eighteenth article of amendment to the Constitution of the United States is hereby repealed.

Section 2. The transportation or importation into any state, territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited.

Section 3. This article shall be inoperative unless it shall have been ratified as an amendment to the Constitution by conventions in the several states, as provided in the Constitution, within seven years from the date of the submission hereof to the states by the Congress.

The Grand Assumption

The common understanding of what the 21st Amendment means is that the individual states have the absolute power to regulate and control alcoholic beverages in their own boundaries, and that the federal government must take a "hands off" approach when dealing with state control of such products. That's the common understanding, the Grand Assumption, if you will; it is the interpretation that was undisputed for a little over 50 years, the reason why alcoholic beverage regulation is so disparate among the various states.

That's why states like Pennsylvania and Utah exert so much control over the distribution and sale of alcoholic beverages that they have deemed the State as the sole importer, wholesaler, and retailer of alcoholic beverages; in order for its citizens to purchase alcoholic beverages, they must do so through state stores.

This monopoly system is extremely lucrative for the state, but may not be as beneficial for its consumers, who may not find product that is openly available just across the border.

That's why other states have created elaborate licensing and tax systems for alcoholic beverages.

That's why wholesalers of alcoholic beverages support the continued existence of statutes that require that all alcoholic beverages MUST go through a wholesaler. In any other business, if you've found a way to effectively and profitably eliminate the middle distribution level, you'd be considered a business wizard. In the alcoholic beverage industry, you'd be considered a criminal.

That's why retailers of alcoholic beverages are the only ones that are authorized to sell alcoholic beverages to consumers in their states. Some states permit producers in their state to sell product directly to consumers. California, for example, allows wineries to sell wine to consumers.

That's why it's so difficult to effectuate "silver bullet" legislation that would make mail-order wine available in all states to all consumers.

Nothing in the law is absolute, and our client wineries know that a state's right to control alcoholic beverages within its own boundaries is not perfect. Still, while we may not agree at times with issues of temperance, we can all agree that states have a legitimate right to legislate in areas that deal with public safety. The controversies come about when state rights aren't necessarily related to legitimate state interests.

You should realize that even today, as you read this document, there are state laws being enforced that for any other industry would be found to be an antitrust violation. As you read this article, you should know that there are state laws that isolate alcoholic beverages from the more general regulatory scheme simply because of the 21st Amendment. And you should keep in mind that alcoholic beverage regulation, while it may have started out with the noble purpose of addressing temperance issues, today are as much a product of politics and the twisted manipulation of the Grand Assumption. State statutes are justified, at times, in terms of public safety but in reality deal as much with profit and monopolies.

When a New Jersey ABC seizure of wine occurred in 1996, many were quick to cite the US Constitution's Interstate Commerce Clause as the basis for the claim that the state lacked jurisdiction to empower it to seize the wine in the first place. Whether state prohibition of direct consumer wine shipments originating from outside the state are a violation of the Interstate Commerce Clause is a legal conclusion best left to the courts. It may very well be that interstate wine shipments are within the province of federal rather than state laws. But litigation costs an extraordinary amount of money, and the price of losing can sometimes have far-reaching repercussions. Alcoholic beverage producers have been careful when picking their legal fights.

Enforcement

Although legal scholars would debate the Grand Assumption, it is this most prevalent interpretation of the 21st Amendment. Even today, state lawmakers take a "You (i.e., the federal government) Can't Make Me" attitude when they consider alcoholic beverage bills. After all, doesn't the 21st Amendment act as a shield to federal preemption? Doesn't the 21st Amendment preclude federal intervention in a statute that might otherwise be federally unlawful?

In 1997, when the Florida Attorney General brought suit against several New York and California retailers, it did so in federal district court, where Florida hoped that the US government would be compelled by the authority of an obscure federal law to enforce state alcoholic beverage laws in a high stakes financial shell game. The 'our state law, but your federal money' position resulted in a dismissal of the case on the federal level. You can find information on the ongoing Florida litigation at the Coalition for Free Trade web site as well.

Midcal Aluminum - The 21st Amendment v. Federal Antitrust Laws

In the late 1970's, California had a law requiring price posting. Winery operators had to post the minimum price that a retailer could sell their wine at. This was because one of the state's interests was avoiding "price wars" that might lead to increased alcoholic beverage consumption and the increasing insobriety of its citizens. Wineries had to post their consumer prices monthly by a specified date as did all competitors. Although "Uniform minimum price schedules" had been found by a California court as early as 1948 as being in conflict with the state's antitrust laws, the state allowed the provision to stand because the law was part of the Alcoholic Beverage Act which was legislation passed AFTER the antitrust laws. That is, until the issue was again litigated in the late 1970s.

In 1980, the US Supreme Court ruled that the "uniform minimum price schedules" were a restraint of trade in violation of the Sherman Antitrust Act. The court ruled that the role of the state in the pricing scheme was insufficient to qualify for what is called "state action immunity." The Court determined that the national policy in favor of competition should prevail over the state interests of promoting temperance and preserving small retail stores, since the scheme had little impact on those interests (California Retail Liquor Dealers Association v. Midcal Aluminum, Inc. (U.S. Sup.Ct. 1980), 445 U.S. 97, 100 S.Ct. 937, aff'g Midcal Aluminum, Inc. v. Rice (Cal.Ct. Of App. 1979), 153 Cal.Rptr. 757).

The Midcal case was the first in a series of cases that weakened a state's reliance on the 21st Amendment. While Midcal dealt with pricing practices, later cases have measured the constitutionality of a state statute with other provisions of federal law.

Preferential Taxes - The 21st Amendment v. Interstate Commerce Clause

Let's say you're in a state that wants to protect its agricultural interests. How many states don't? Even in Hawaii there's an alcoholic beverage industry. Back in the 1980's, producers making a spirit called okolehao out of the distilled extract of the ti plant were given an excise tax exemption for its products as long as it was produced in Hawaii. Producers of alcoholic beverages selling product in Hawaii had to pay the excise tax, which at the time was 20% of the wholesale value of the product. This is discriminatory, you say. But you're an alcoholic beverage, they say, and we have the ULTIMATE authority to regulate alcoholic beverages within our own boundaries. Says who, you ask. Says the 21st Amendment, they respond.

But on June 29, 1984, the Supreme Court of the United States decided that the Hawaii tax violated the Commerce Clause of the US Constitution (Bacchus Imports, Ltd. v. Dias, 104 S.Ct. 3049 (1984); No. 82-1565). The Court held that the tax exemption had both the purpose and effect of discriminating in favor of local products. In its ruling, the Court stated that the Commerce Clause limits the manner in which a State may legitimately compete for interstate trade, and that the tax exemption exceeded those limits. Furthermore, the Court ruled that no State may discriminate by taxing products manufactured in any other State at higher rates than in-state products. In its ruling, the court held that the Twenty-First Amendment to the US Constitution did not authorize such a tax exemption, since the central purpose of the Amendment was not to empower States to favor their local liquor industry by erecting barriers to competition. In the aftermath of Bacchus, many states repealed their preferential tax schemes. Still, there are some states which have enacted tax categories which continue to have a preferential, albeit more subtle, effect.

One of the more important things about Bacchus is what the Court did NOT say. It did not say that the 21st Amendment did NOT empower states to favor its local liquor industry. It simply stated that it could not do so by enacting anti competitive statutes. More importantly, it stands for the position that states may not avoid Constitutional or federal scrutiny by hiding behind the 21st Amendment.

Affirmation - 21st Amendment v. Extraterritorial Effect of State Law

Suppose you were selling chewing gum. You want to sell a lot of it. You want to sell it in South Carolina, Texas, Idaho, everywhere, but currently you're only selling in Texas. You approach a retailer in South Carolina and tell him that you've got this great Chardonnay-flavored chewing gum, and the retailer says: "Sorry, but I can't buy that great chewing gum, as great as it is, from you. I can only buy it from Ms. Wholesaler." So you go to Ms. Wholesaler and you say: "Have I got THE GREATEST chewing gum you've ever tasted in your life! It's already a big hit in San Antonio, Dallas, Fort Worth. Texans love it - South Carolinians will, too."

You want to sell it. Ms. Wholesaler wants to buy it. You want your gum in South Carolina - South Carolinians NEED you gum. But see, there's this law in South Carolina. It requires that all chewing gum sellers must sell their gum to Ms. Wholesaler at a price no higher than the lowest price the gum is sold to any other wholesaler in any other state. You must "affirm" to the South Carolina Chewing Gum Commission that you're doing this. You sell it in South Carolina anyway. You want the business.

Later, you think your chewing gum is overpriced in Texas. You want to lower the price of your gum in Texas because you want to increase sales. But you can't, because if you do so, you're in violation of South Carolina's law unless you lower your price in South Carolina as well. But you don't want to lower the price of your gum in South Carolina because you think the current price is consistent with consumer demand. So you go about your business, keeping the price of your product in Texas artificially high because of South Carolina's law. You realize how futile it would be for you to lower your price in Texas or Arizona or Hawaii or anywhere else because the increased sales there would be offset by the decreased profits caused by your price reduction in South Carolina.

This is a hypothetical situation. There are no laws like this that apply to chewing gum, firearms, or pharmaceuticals. But there are laws like this for alcoholic beverages. There were many more states that had laws like this until 1986, when a South Carolina federal court ruled that the state's affirmation laws interfered with the Commerce Clause because of its extraterritorial effect that rendered it unconstitutional (Brown-Forman Corp. V. South Carolina Alcoholic Beverage Control Commission (DC S.C. 1986), 643 F. Supp. 943).

Brown-Forman teaches us that, at least at the district court level in South Carolina, that affirmation laws are an unconstitutional exercise of state power because they interfere with interstate commerce. Now states simply contract with suppliers of wine and spirits that they sell their product to the state at a price no higher than the lowest price they sell their products to any other wholesaler in any other state. There are no statutes to be ruled unconstitutional. And if you want to sell your wine in that state, you generally will submit to the sales terms. Who else can you sell to? Affirmation principles are applied even now to sales of wine, but much more for spirits.

21st Amendment Meets Commercial Free Speech

Rhode Island has a very clear prohibition against the advertising of alcoholic beverage prices. When a Rhode Island retailer took out an ad that advertised the exact sale prices of potato chips and cocktail mixers, it also referred to its selection of wine with the word WOW. That word, unfortunately, was considered price advertising by the state of Rhode Island. That led to a $450 fine levied against the retailer, and an eventual date with the United States Supreme Court.

At issue for Wine Institute was some language in the Court of Appeals decision that alcoholic beverage laws that might infringe on constitutional rights enjoyed an implied presumption of validity. It was this 'pardon me while we trample on your constitutional rights' attitude that had us a bit nervous. Wine Institute, along with beer and distilled spirits organizations, filed an amicus brief in the case of 44 Liquor Mart v. Rhode Island to address that very point. We were pleased with the court's ruling that the 21st Amendment did not replace all of the other constitutional rights that a business may have, even for commercial free speech.

44 Liquor Mart is an extremely important decision not simply for wine, and its effects will be felt in other circles. Issues in California and on the federal level that challenge government-compelled payments to agricultural commissions and marketing orders are currently faced with their own First Amendment issues, and I have no doubt attorneys and the courts will be looking for guidance on what to do with the 'Got Milk' organizations now in operation. Stay tuned.

Conclusions

So what has all of this to do with direct wine shipments? Not much, but you've got to be asking yourself whether direct shipment provisions interfere with interstate commerce like Brown-Forman and Bacchus. And you've got to wonder whether a state's ban on alcoholic beverage solicitation from out of state wineries is a First Amendment violation as with 44 Liquor Mart.

Does a state have a legitimate interest in protecting its citizens from the wide net of intemperance? States may have an interest in protecting its citizens from harmful products by controlling its distribution, and alcoholic beverages can be abused. But to say that a product is legitimately in the state because it went through an established state distribution system while the identical product is illegitimate simply because a consumer received it directly from the producer who just so happens to have sent it from another state raises questions. What state interest is being served?

Today, there are state laws that walk the edge of the 21st Amendment. There are many states that have enacted franchise laws, for example, that protect the wholesaler from losing accounts. Many states today not only require California wineries to appoint a wholesaler in their state, but further to assign that wholesaler with an exclusive sales territory for the sale of the winery's product. And if the wholesaler doesn't perform or meet even reasonable sales expectations, the same California winery finds itself virtually unable to terminate its relationship with the wholesaler. There are still states that maintain preferential tax provisions for "home grown" products, only the preference is not manifested by a tax exemption.

The 21st Amendment is what has given states the authority to establish the fixed distribution channels that it currently regulates. It is also the authority that makes direct shipments of wine from one state to another so extremely difficult. Each state might as well be a separate country. Indeed, you won't find many wineries taking issue with the statement that it isn't any easier to ship wine into Montana as it is to deliver product to an address in Tokyo (sometimes Tokyo is easier). And that is why Wine Institute sought "reciprocity" legislation. Reciprocity is, in essence, the signing of a treaty between states to recognize common shipment privileges. Even if you can cross the political hurdles of Federal legislation, you must still test its constitutionality next to the authority of the 21st.

Wholesalers and retailers are usually the opponents to direct wine shipments. They believe that any infringement on their current monopolies will hurt their businesses. Others believe that by opening the state to limited, regulated (and sometimes even taxed) shipments, wineries can build brands that will result in increased sales for in-state wholesalers and retailers. Revenue issues are common to all mail order ventures, but even more so for alcoholic beverages, as additional excise taxes are imposed on such products. Quite simply, the concept of direct interstate shipments of wine is not only a departure from the established distribution channels but it is also considered to be a threat to those who place their livelihood on such a distribution system. The concept stands for the proposition that states do not have the absolute power to regulate alcoholic beverages within their own boundaries, a Grand, but perhaps flawed, Assumption.